Can "Consumerism" Slow the Rate of Health Benefit Cost Increases?

Employers are considering ways in which they can restructure health benefits. A few employers have turned to, and many others are considering, a trend that started in the 1980s to give employees more choice among different types of benefit arrangements, while at the same time exposing employees more directly to the cost of providing health benefits and health care services. This Issue Brief explores the spectrum of various health benefit options to understand the issues involved.

Americans have been spending an ever-increasing amount of money on health care services. Health spending totaled $73 billion in 1970, rising to $1.3 trillion in 2000. Spending increases have been attributed to the aging of the population, the comprehensiveness of insurance, increased income of employees, differential productivity growth from medical care, avoidable administrative expense, provider-induced demand, and technological innovation.

The terms "defined contribution" and "consumer-driven" have been used to describe a wide range of possible approaches to give employees more incentive to control the cost of either their health benefits or health care and to reduce the size and volatility of employer spending. All strategies to increase consumer involvement in health care spending decisions have a common theme: to shift decision-making responsibility regarding some aspect of health care or delivery from employers to employees. The approaches fall along a continuum of options. They include the traditional large-employer health plan choice model, the out-of-pocket choice model, tiered provider networks, various health spending accounts, and vouchers.

While various types of consumer-driven health benefit approaches may result in more efficient spending on health care services, this does not necessarily mean that spending will either decline or slow down. It is well known that a small fraction of the population accounts for a large share of health spending. Among the adult population with employment-based health insurance, the top 1 percent of spenders accounted for 20 percent of all spending in 1998. Overall, the top
10 percent of spenders accounted for 58 percent of all health care spending, while the top 50 percent accounted for 95 percent of all spending. Unless consumer-driven health benefits include incentives and tools to affect the spending patterns of high users of health care services, the total cost of providing health care benefits is unlikely to be significantly affected.

A movement to consumer-driven health benefits has implications for health benefit costs, utilization of health care services, quality of health care, the health status of the population, risk selection, and efforts to expand health insurance coverage. Ultimately, the success or failure of consumer-driven health benefits will be measured by its effect on the cost of providing health benefits and its effect on the number of people with and without health benefits.